On 11 July 2024, the FCA published Policy Statement PS24/6 which sets out its feedback to responses to its consultation paper CP 23/31 and publishes its final listing rules reforming the structure and regulation of the UK’s Listing Regime. The new listing rules will enter into force on 29 July 2024, leaving listed issuers with two and a half weeks to review and prepare for their implementation.
We discuss some key features of the new Listing Regime below.
New structure
A new single listing segment for commercial companies issuing equity shares (the “commercial companies category”) replaces the premium and standard listing segments of the Official List and Main Market of the London Stock Exchange. On 29 July 2024, most premium-listed companies will be assigned to the commercial companies category which will be subject to a more streamlined regulatory regime; based primarily on the premium listing segment but removing certain eligibility requirements and continuing obligations to enhance the UK’s competitiveness as a prime listing destination.
Transition category
Similarly, on “day 1”, a majority of existing standard-listed commercial companies issuing equity shares are expected to transfer automatically to the “transition category”, which is subject to regulation replicating the ‘old’ standard listing rules. Issuers may choose to maintain their listing here whilst considering whether to “step-up” to the commercial companies category or switch to another category in due course. Currently, there is no obligation to transition from this ‘holding’ category but the FCA has confirmed that it will be closed to new applicants.
International companies with a secondary listing of shares
The FCA has designated a new listing category exclusively for international companies with a secondary listing of their equity shares in the UK. Eligible companies will be mapped here upon implementation and the category will also be open to new international applicants.
“Step-up” to the commercial companies category
Issuers mapped to the transition or international secondary listing categories which choose to “step-up” to the new commercial companies category in due course will be subject to a modified transfer process in which the FCA would only assess the limited number of eligibility requirements that are additional to those that standard-listed issuers were subject to under the ‘old’ regime. To be eligible for the simplified transfer process, for at least 18 months issuers must have had their shares listed on a continuous basis, not been subject to a listing suspension and not undergone a significant change to their business. A sponsor must be appointed to undertake a targeted sponsor service for the transfer.
Other listing categories
Separate listing categories are created for issuers of equity shares that are closed-ended investment funds, open ended investment funds, and shell companies. Additionally, issuers of specific securities are subject to the rules of a designated listing category including for depositary receipts, non-equity shares, debt securities, securitised derivatives, and warrants, options and other miscellaneous securities.
London markets – now open to a more diverse range of IPO candidates
It’s an optimal time for early stage high growth companies, including founder-led or, so called ‘new economy’ businesses, to consider a listing on London's main market. These businesses might have fallen previously at the first hurdle – having been unable to satisfy the stringent premium listing criteria to produce three years’ audited historical financial information, demonstrate a three-year revenue earning track record or provide a clean working capital statement; all of which have now been removed as listing conditions in the new commercial companies category. Requirements for an applicant’s independence and control over its business have also been removed – paving the way for more diverse business structures (such as those operating franchise models) to seek a listing. Significantly, the new commercial companies category is now open to listings of more flexible forms of dual class share structures allowing founders to retain greater control over the company from admission – a move which will align the London market with its global competitors.
Under the new regime, an applicant remains required to publish an FCA approved prospectus in respect of the admission of its shares, the form and content of which is subject to ongoing FCA review and consultation.
Greater freedom for listed companies to pursue growth
Upon implementation of the new rules, UK-listed issuers will no longer be required to produce a shareholder circular or seek prior shareholder approval before entering into significant, or larger related party, transactions. The removal of these long-standing obligations should enable companies to pursue strategic growth with greater certainty, allowing them to be more competitive in M&A processes versus other acquirors who are not subject to similar regulatory constraints.
Instead, in-scope transactions will be subject to more proportionate requirements as outlined below.
Significant transactions
For large non-ordinary course transactions which reach 25% or more on the amended class tests, certain key information must be announced by issuers as soon as possible after the terms are agreed. Such announcement must contain detailed disclosures, including information relating to the transaction, certain financial and non-financial information and any other information necessary to provide shareholders with an understanding of the terms of the transaction and its impact on the issuer.
Certain further information is then required to be announced as soon as possible after the first announcement, and in any event by no later than the completion of the transaction. After completion, issuers will also have to make a notification to indicate that the transaction has taken place.
Note that the profits test has now been removed from the class tests on the basis that it can sometimes produce anomalous results.
There will be no requirements for those transactions which do not exceed the 25% class thresholds, allowing companies to pursue ‘class 2 sized’ deals without being subject to any listing requirements. However, companies must comply with all other regulatory obligations in respect of their transactions, notably, their disclosure obligations under the UK Market Abuse Regulation.
The new regime for significant transactions will not apply to reverse takeovers which will continue to remain conditional upon obtaining prior shareholder approval and the distribution of a shareholder circular.
Related party transactions
Companies proposing to enter into related party transactions which reach 5% or more on any amended class tests must obtain prior board approval (excluding votes of interested directors), prior written confirmation from a sponsor that the terms of the proposed transactions are fair and reasonable for shareholders, and must also announce the transaction as soon as the terms are agreed. Additionally, the FCA has increased the threshold of who is regarded as a 'significant shareholder' from 10% to 20%, which will reduce the amount of related party transactions in scope of the regime.
Greater accountability for directors?
Amongst the reforms is the restructuring of the Listing Principles so that a single set of principles applies to all listed issuers. In new guidance, the FCA has placed emphasis on the role of the directors in ensuring that the Listing Principles are properly applied in practice; in particular, by expressly providing that the directors should take reasonable steps to ensure that effective governance arrangements are in place and maintained at all times and that the directors should deal with the FCA in an open and co-operative manner, including when responding to requests for information and attending interviews.
Additionally, in respect of any new listing applications for securities (including debt), there is a new requirement for the applicant to submit a board declaration form to the FCA which includes standard wording providing a board confirmation that the issuer has established adequate procedures, systems and controls to enable it to comply with its relevant regulatory obligations.
Whilst the FCA has noted that the additional guidance does not impact existing directors’ duties but rather, reflects existing expectations of listed board directors – it would seem that both the new guidance and board declaration indicate a clear expectation that directors must play a critical role in ensuring the company’s compliance with its regulatory obligations.
More targeted role for sponsors
A sponsor must be appointed for a new listing on the commercial companies category but its role is reduced post admission due to the removal of the requirement for a shareholder circular for significant and related party transactions. Instead, a sponsor’s ongoing role is more targeted to focus on reverse takeovers; significant further issuances involving an FCA-approved prospectus; providing related party transaction fair and reasonable opinions; and acting as a key liaison with the FCA where issuers seek guidance, modifications or waivers in respect of the listing rules.
Long-awaited reforms encourage investors to embrace risk and reap rewards
These highly anticipated reforms represent a significant overhaul in the UK’s Listing Regime, removing well-established eligibility criteria and shareholder protections, in a bid to attract a more diverse range of companies to list in London. Investors are asked to bear greater risk as a result of the streamlined requirements and, consequently, will need to carefully consider a company’s disclosures – but in return, investors should have access to a wider range of promising investment opportunities.
Meanwhile, standard-listed companies can choose to maintain their status-quo on the transition category, whilst they consider whether or not to “step-up” to the commercial companies category and be subject to increased regulatory obligations. Their decision may be influenced by a potential influx of companies choosing to list on the new category – and to date, we have already seen growing optimism for the future IPO pipeline, with several companies recently announcing that they are considering a London listing in the coming months. No doubt, FTSE Russell’s confirmation that issuers on the commercial companies category will be eligible for its UK index inclusion will be a significant draw for applicants seeking liquidity and access to a sophisticated global investor base.
The listing reforms, although significant, form only one component of a wider workstream to address the UK’s ailing capital markets, first launched by Lord Hill’s Listing Review in 2020. Consequently, the success of the new Listing Regime will be interlinked with any success of other initiatives to improve the wider capital markets ecosystem, including the introduction of the new public offers and admissions to trading regime (expected to come into force next year) and the potential reforms to the investment research and secondary capital markets regimes.
These actions, together with any changes to encourage pension funds and asset managers to once again deploy their capital into domestic markets, are widely considered to be the catalyst for reviving London’s capital markets. Consequently, overseeing the successful implementation of these reforms is likely to remain a key priority for the Labour Government.
Next steps
If you are considering a listing in London or have any questions on the new regulatory regime, please contact one of the listed contacts or your usual contact at Hogan Lovells.
Authored by Daniel Simons, Tom Brassington, Danette Antao and Wilson Pek.
